Equity and Second Charge Mortgages Explained
Equity is fundamental to applying for second charge mortgage loans because you need to have enough equity in your property to secure the second lending amount. Your equity is the proportion of your home without any debt secured against it.
For example, if you have a home worth £500,000 and have a first mortgage balance of £200,000, you could use the £300,000 equity as security to apply for second charge mortgage loans.
Lenders calculate your equity and will base the maximum lending available on second charge mortgage loans on a percentage called the LTV, or Loan to Value. Most providers will lend up to around 80% or perhaps 85% on second charge mortgage loans, which means the most you'll typically be able to borrow is 80 to 85% of your equity.
So why is a second mortgage more expensive if it is secured against your equity? The reality is that a repossessed property is normally sold for less than market value – and homes can depreciate as well as appreciate.
Therefore, regulated second charge mortgage lenders won’t lend up to 100% of the equity and charge higher second charge mortgage fees to protect against the risk that they make a loss if you cannot repay the debt in full.
Reasons to Consider Second Charge Mortgage Loans
As we’ve noted, homeowners apply for second charge mortgage loans for myriad reasons. Still, it is important to work with an experienced broker if you need help deciding whether to opt for a second charge mortgage or remortgage to evaluate all the costs and expenses.
The positive is that most second charge mortgage loans are fairly open to any uses you have in mind, so you might decide to compare second charge mortgage products for the following financing requirements.
- Debt consolidation: if you have multiple debts, you can borrow against your equity through second charge mortgage loans to repay your creditors, and usually reduce the costs associated with repayments.
- Extending or improving your home: second charge mortgage loans are often used to finance home improvement works such as installing a new kitchen, converting your attic, or adding an extension to increase the size and value of the property.
- Large-ticket purchases: you could opt for second charge mortgage loans to cover the costs of paying for a holiday, covering a child’s education cost, financing medical treatments or purchasing a car, as a few examples. Although second charge mortgage fees are higher than first charge lending, the interest rates may also be lower than those available through alternative short-term loan products.
Some lenders will ask about the purpose of your second charge mortgage loans, whereas others will be more focused on property valuations and your creditworthiness to make a lending decision.
Second Charge Mortgage Pros and Cons
Every borrowing product has pros and cons, and it’s essential you compare second charge mortgage products and lenders before making any long-term financial decisions, particularly if you have the option of deciding between a remortgage on a first charge vs a second charge mortgage application.
One of the most obvious downsides is that second charge mortgage loans are more expensive than first charge mortgages, and the larger the total debt, the longer it will take to repay and the higher your mortgage costs will be each month.
It is also vital to appreciate that non-payment of second charge mortgage loans puts your property at risk in the same way as any other mortgage.
However, you may not be able or willing to consider a remortgage because:
- Your first mortgage lender will not lend anything further to you or cannot offer competitive interest rates, making second charge mortgage fees a better option.
- You are tied into a fixed rate, and deciding on a second charge mortgage or remortgage involves factoring in steep early exit penalty charges.
- You do not wish to apply to your first charge mortgage lender, either because you are not keen on any of the products they have available or you would prefer to borrow from a different provider offering second charge mortgage loans.
The advantage of second charge mortgage loans is that, because the product is secured against your equity, you can normally borrow as much as you require, provided it fits within the maximum LTV applied by most lenders.
Although second charge mortgage fees are higher than for first charge mortgages, they may also be lower than other products such as personal loans or credit card financing.
Alternatives to Second Charge Mortgage Loans
We always advise any prospective applicants considering second charge mortgage loans to contact our experienced advisers at Revolution to ensure they have a full understanding of the second charge mortgage fees and other potential solutions.
You might consider remortgaging, a secured personal loan or a home equity loan, and the right adviser will help you compare second charge mortgage costs with other financing to make informed, knowledgeable judgements.
Please get in touch with Revolution Finance Brokers at any time if you'd like more information about first charge vs second charge mortgage products or to discuss your circumstances to identify the best way forward.
